Take Caution with Quitclaim Deeds

Quitclaim deeds may void title coverage.

Take Care with Quitclaim Deeds

Title insurance policies are intended to be one-time expenditures at the time a property is purchased, providing coverage against title defects even after the property is re-sold. However, ownership changes, such as re-titling property for estate planning or other purposes, can reduce or void coverage provided by title policies. Maximizing title policy benefits requires thoughtful planning to insure that the owner's policy is issued on the correct deed at closing and that the optimal form of deed is used in subsequent conveyances.

Consider the following scenario—
Individual buys a home and opts in favor of an owner’s title insurance policy. The title premium is paid and a policy issued in the buyer’s name as it appears on the deed from the seller to the buyer. After closing, the buyer requests to be taken off title for estate planning purposes and substituted for the spouse. A quitclaim deed is then prepared, executed and recorded, vesting title solely in the spouse's name.

Unbeknownst to the buyer, the prior owner, who recently lost the home to foreclosure, has decided to dispute ownership. The prior owner sues the foreclosing lender and names the current title holder (the spouse) as a party to the suit.

Unfortunately, the spouse may have no coverage under the title policy issued at closing for two reasons—
  • The secondary deed was not the insured instrument under the owner's title insurance policy; and
  • The form of the secondary deed was a quitclaim deed. Because the deed contained no warranties of title, there is no claim against which the buyer's policy is obligated to indemnify.

Title Policies Insure Deeds
When an owner’s or lender’s title policy is issued, the policy provides coverage on an underlying deed. A loan policy insures the lender's interest on a security deed while an owner’s policy is based on the deed used to convey title to the buyer. When property is re-sold or subsequently transferred, an owner's policy continues to remain in effect in the future against inherited title defects passed to a successor. However, indemnification can be cut off by the type of deed used in the subsequent conveyance.

Take Caution with Quitclaims
After a property is quitclaimed, the former owner does not retain liability for title defects passed on to subsequent owners, even though he may have been covered against the same defects by his owner's title policy. This means there is no title insurance indemnification to kick into gear after a quitclaim deed is entered into the chain of title. On the other hand, a general warranty deed does contain warranties and covenants of title. If this type of deed is used, the seller may remain on the hook for title defects, as well as the title insurer. Although not a substitute for a new title policy, using a warranty deed in lieu of a quitclaim deed can help keep some teeth in the former owner's title policy.

Best Practices for Managing a Change in Title
1. Awareness. The indiscriminate execution and recordation of deeds can lead to loss of title coverage. It is important to be aware that title policies have the ability to provide value even after a deed transfer. However, the type of deed used can affect future coverage under an owner's title policy.
2. When to Avoid Quitclaim Deeds. Avoid using the quitclaim instrument unless the transaction is arm's length. Instead, consider using a warranty deed instrument when making title changes for estate planning or other non-sale situations. While a warranty deed is not a substitute for a new title policy, it may the best option before resorting to a new title policy.
3. Seek Advice from a Real Estate Attorney. Other professionals and non real estate attorneys may not be aware of the nuances involving deed transfers and title insurance. Discuss contemplated title changes with a real estate attorney alongside the advice of other professionals to determine the best course of action.
4. Review and Understand the Terms of Coverage on Existing Title Policies. Some owner title insurance policies provide post-transfer coverage under limited circumstances.
5. Ownership Change at the Purchase Closing? When an additional deed must be executed at closing to change ownership, the best practice is to have an endorsement added to the title policy which insures the secondary transfer.

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